The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2443-4175.htm Credit relevance after mandatory IFRS adoption in deposit money banks of Nigeria Effect of IFRS on credit relevance A difference-in-differences (D-in-D) approach Dagwom Yohanna Dang Department of Planning, Research and Statistics, Plateau State Internal Revenue Service, Jos, Nigeria James Ayuba Akwe Received 8 September 2019 Revised 26 October 2019 1 December 2019 27 December 2019 Accepted 18 January 2020 Department of Finance and Accounts, Securities and Exchange Commission of Nigeria, Garki, Nigeria, and Salisu Balago Garba Banking Supervision Department, Central Bank of Nigeria, Nigeria Abstract Purpose – Credit relevance of financial reporting can be influenced by change in financial reporting framework. This study aims to examine the effect of mandatory international financial reporting standards (IFRS) adoption on credit relevance quality of financial reporting of deposit money banks (DMBs) in Nigeria. Design/methodology/approach – This study uses difference-in-differences (D-in-D) design for its modelling. Panel data regression analysis based on the D-in-D model is used in analysing the data collected from secondary sources. Findings – The findings of this study are that based on the D-in-D approach, there is a significant and positive effect of mandatory IFRS adoption on credit relevance quality of financial reporting of DMBs in Nigeria, and that there is also a significant difference in the credit relevance quality of financial reporting of mandatory adopting banks in the post-mandatory IFRS adoption period compared to pre-mandatory IFRS adoption period. Research limitations/implications – To the best of this study’s review, there is inadequacy of literature within the credit relevance research in Nigeria. In the light of this, this study intends to fill the gap. Practical implications – This study is specifically important to regulatory authorities, both primary and secondary regulators. Specifically, this study has implications in the regulatory roles of Central Bank of Nigeria (CBN) and Financial Reporting Council of Nigeria (FRC). However, the study recommends that regulatory authorities should encourage DMBs to avail their financial reports annually to credit rating agencies (local and international) for proper evaluation for subsequent ratings. Originality/value – The peculiarities in this study, that is the utilisation of the D-in-D design and the use of credit relevance metric as the dependent variable, made this study important and novel to push the frontier of existing knowledge. Keywords Mandatory IFRS adoption, Credit relevance, Quality of financial reporting, Difference-in-differences Paper type Research paper JEL Classification — M4, M42, M48 © Dagwom Yohanna Dang, James Ayuba Akwe and Salisu Balago Garba. Published in Asian Journal of Accounting Research. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode Asian Journal of Accounting Research Emerald Publishing Limited 2443-4175 DOI 10.1108/AJAR-09-2019-0070 AJAR 1. Introduction In recent times, the world has experienced quite a number of corporate failures. These corporations were mostly companies that were quoted on stock exchanges and regulated by the relevant statutory authorities. A few cases were the failures of Enron and WorldCom in the USA, Parmalat in Italy and Allied Irish Bank (AIB) and National Irish Bank (NIB) in the Ireland since 2001 (Ebert and Griffin, 2009). In Nigeria, the cases of Cadbury (Nigeria) Plc overstating its accounts of 2002–2005, and failed banks of 1994 and 2008/2009 are examples. Different factors were responsible for these corporate failures, but the prominent amongst them were bad corporate governance framework and inadequate institutional framework, which includes inadequate framework for financial reporting (Dibra, 2016; Moxey and Berendt, 2008). More often, regulations and reforms in financial reporting are initiated after wellpublicised corporate scandal (Haslam and Chow, 2016). For instance, the number of corporate scandals that took place in the USA between 2000 and 2001 through creative accounting practices eroded trust in financial reporting, thereby giving way for a reform through the promulgation of Sarbanes–Oxley Act in 2002, with the main aim of restoring the integrity of financial reporting (Cohen et al., 2008). The global financial crisis of 2007/2008 has shown how incredibly weak the checks and balances in the public capital markets can be, leading to several financial reporting regulations by International Accounting Standards Board (IASB) (Hoogervorst, 2012). In Nigeria, the banking reform championed by the Nigerian apex bank, Central Bank of Nigeria (CBN) in the mid-2009 included accounting reform in a policy statement. The reform issues were that all banks and their subsidiaries must change and adopt common financial year end for the year 2009 and beyond to enhance comparability (Central Bank of Nigeria, 2009), and all banks should adopt international financial reporting standards (IFRS) by the end of 2010 (Alford, 2010). This was followed by the announcement in 2010 of the Roadmap to the Adoption of IFRS in Nigeria. The main objective of IASB is to develop a globally acceptable set of financial reporting standards, which is of high quality called IFRS. The expectation here is that the adoption of IFRS should enhance the relevance quality of financial reporting (Barth et al., 2008). The anticipated outcome of financial reporting reform, especially the adoption of IFRS by different countries – developed and emerging – has sparked-off different research (Adereti and Sanni, 2016; Alfaraih, 2009; Barth et al., 2008; Chen et al., 2013; Dang et al., 2017; Devalle et al., 2010; Kaaya, 2015; Kasztelnik, 2015; Lee et al., 2013; Mohammed and Lode, 2016, 2015; Omokhudu and Ibadin, 2015; Onalo et al., 2014a, 2014b; Ouezzani and Alami, 2014; Oyerinde, 2011; Paglietti, 2009; Sovbetov, 2015; Tsalavoutas, 2009; Umoren and Enang, 2015) on the effect of adoption of IFRS on the desired outcome, basically value relevance. A few foreign studies (Chan et al., 2013; Florou et al., 2017; Kosi et al., 2010; Lima et al., 2016) were carried out on the effect of IFRS adoption on credit relevance. This study focuses on the Nigerian situation; therefore, the review of Nigerian empirical studies on the effect of IFRS adoption on relevance quality of financial reporting reveals some gaps. Firstly, most of the Nigerian studies exclude the use of credit relevance metric as surrogate for relevance quality of financial reporting. Credit relevance model was recently developed by scholars (Florou et al., 2017; Hann et al., 2007; Kosi et al., 2010), because of the numerous demands for financial reporting information from users other than stock market investors to address specific needs for useful financial reporting information (Paşcan, 2015). Credit relevance is developed to investigate the effects of IFRS on financial reporting quality (FRQ) in terms of the needs of banks and creditors. However, there is the need to bridge that gap as far as the review is concern in IFRS studies in Nigeria to consider credit relevance as a measurement for relevance quality of financial reporting. This study is an extension of the study of Dang et al. (2017), which finds a significant effect of mandatory IFRS adoption on value relevance quality of financial reporting in the Nigerian deposit money banks (DMBs). This current study uses similar data to test the effect of mandatory IFRS adoption on credit relevance quality of financial reporting in Nigeria. Secondly, most of the Nigerian studies on relevance quality of financial reporting consider only the quoted DMBs. Whereas, all banks are considered as public interest entities by virtue of the provision of Section 77 of the Financial Reporting Council of Nigeria (FRC) Act 2011. Lastly, the review reveals the non-use of difference-in-differences (D-in-D) research design. Current studies on the effects of IFRS adoption on value relevance quality of financial reporting around the world adopt the use of D-in-D research design (Chen et al., 2015; Doukakis, 2014; Hong et al., 2014; Li and Yang, 2016), because of its ability to test the effect of pre- and post-IFRS adoption on credit relevance quality of financial reporting of different treatment and non-treatment (control) groups. Therefore, the use of the D-in-D research design for a Nigerian study will bridge the gap in existing empirical literature in Nigeria as reviewed. However, to fill the gaps in the existing empirical literature, this study intends to examine whether mandatory adoption of IFRS has any effect on the credit relevance of financial reporting of DMBs in Nigeria using the D-in-D design. To the best of this study’s review, there is inadequacy of literature within the credit relevance research in Nigeria. In the light of the above research problem, the objective of this study is to examine the effect of mandatory IFRS adoption on credit relevance of DMBs in Nigeria using the D-in-D approach. This study is specifically important to regulatory authorities, both primary and secondary regulators. The peculiarities in this study, that is the utilisation of the D-in-D design and the use of credit relevance metric as dependent variable, made this study important to push the frontier of knowledge. The remaining part of this paper comprises of literature review, methodology, results and discussions and conclusion and recommendations. Some of these sections have subsections for clearer perspective of this study. 2. Literature review 2.1 Conceptual framework Financial reporting standards, otherwise known as accounting standards, are a set of accounting theories that create a framework, which ensures an accounting practice complies with the requirement of conformity and uniformity (Glautier et al., 2011; Godfrey et al., 2010; Hendriksen, 1982; Russell, 2006). Simply put, accounting standards are rules or principles that govern the manner in which specific business transactions of incorporated companies are recorded and reported to the public in corporate financial statements. Accounting standards establish and maintain a common language for communicating financial information. These standards are used by management/directors in preparing financial reports in compliance with Section 335 of CAMA 2004. The FRC of Nigeria Act 2011, Section 77 defines financial reporting standards (FRS) as “accounting, auditing, actuarial and valuation standards issued by the Council under this Act”. In 2011, it was expected that IFRS opening statement of financial position would have been prepared by significant and public entities (SPEs) before finally preparing the first set of IFRS financial reporting by SPEs in 2012. These processes involving the SPEs are categorised by the report as Phase 1 of the roadmap (Deloitte Global Services Limited, 2013). However, DMBs are part of the SPEs and were, therefore, expected to mandatorily adopt to IFRS fully by 2012. The mandatory position of the IFRS adoption by 2012 was backed by the promulgation of FRC of Nigeria Act 2011. Value relevance focuses on the equity user-group of financial reporting information, whereas there are other primary user-groups, such as creditor user-group, which also need relevant financial reporting information. However, it is also important to evaluate how relevant financial reporting information is reflected in the debt markets, such as the banking Effect of IFRS on credit relevance AJAR sector. Credit relevance is not among the commonly used metrics for FRQ in accounting research. The study of Hann et al. (2007) is one the first studies to provide a good explanation of credit relevance. Hann et al. (2007) define credit relevance as the association between financial reporting information and creditors’ future cash flow expectations that are captured by credit ratings. Wu and Zhang (2009) measure credit relevance of financial reporting information as the sensitivity of credit ratings to various financial reporting variables. Credit relevance model was recently developed by scholars because of the variety of demands for financial reporting from users other than stock market investors to address specific needs for useful financial reporting information (Paşcan, 2015). Credit relevance metrics were developed to investigate whether IFRS adoption provides quality financial reporting in terms of the needs of lenders, such as banks and other creditors. Credit relevance can be defined as the association between financial reporting measures and market value of debt (Florou et al., 2017). Credit ratings, such as Standard and Poor’s (S&P) credit ratings are identified with financial analysis, especially ratios. However, credit relevance can be summarised as the reflection of financial reporting information on the credit ratings of a bank influenced by financial reporting framework, which has predictive and/or confirmatory relevance to creditors and other credit providers. If changes in financial reporting information relate to changes in credit rating of the bank, it is viewed that the financial reporting information produces relevant information for decision-making (Oyerinde, 2011). 2.2 Empirical review and hypothesis development Apart from the value relevance metrics used by different research, a few studies rely on credit relevance metrics to test for IFRS adoption effects. Kosi et al. (2010) investigate whether mandatory IFRS adoption affects the credit relevance of accounting information. The study finds a significant increase in the credit relevance of financial statement information for mandatory IFRS adopters in the post-adoption period. Florou et al. (2017) examine whether firms reporting under IFRS exhibit credit relevance of financial statements. The study finds an improvement in credit relevance for firms in 17 countries after mandatory IFRS reporting is introduced in 2005 in Europe; this increase is higher than that reported for a matched sample of US firms. Chan et al. (2013) examine whether the mandatory IFRS adoption affects the credit ratings of foreign firms in the USA using regression analysis. The study finds significant higher credit ratings among cross-listed firms after IFRS adoption. Lima et al. (2016) analyse the effects of mandatory IFRS adoption on the Brazilian credit market, with emphasis on the relevance of accounting information to creditors. The results of the analysis suggest that the ability of accounting information to explain corporate credit ratings increased after mandatory IFRS adoption. All the reviewed studies on credit relevance show positive results of IFRS adoption having effect on credit relevance of financial reporting information. However, none of the reviewed studies on credit relevance considers Nigeria as the area of study. In summarising the outcome of the review of existing literature on IFRS adoption effects and credit relevance quality in Nigeria, a number of gaps are established. Firstly, most of the reviewed studies focus on either quoted companies or quoted banks, thereby ignoring the inclusion of non-quoted banks that have a statutory regulator (CBN) in the analysis. Nonquoted banks are included in the definition of public interest entities by FRC of Nigeria Act 2011; therefore, they must adopt IFRS in their financial reporting. This has opened a gap in the existing Nigerian literature for non-inclusion of non-quoted banks in their analysis. Secondly, most of the IFRS studies on banks could not differentiate the banks that voluntarily adopted IFRS prior to 2012 and the banks that only adopted IFRS when it is mandatory in 2012. Effects of IFRS adoption may differ between the two groups of banks, due to differences in the incentives for the adoption of IFRS. Therefore, there is a need to carry out a study analysing the effect of IFRS adoption on value relevance of these two groups, voluntary adopters as the control group and mandatory adopters as the treatment group, as no Nigerian study has done that. Thirdly, considering the period covered for the analysis in all the value relevance and IFRS adoption studies reviewed, none of the studies uses up to a six-year period, with three years as pre-IFRS adoption period and three years as post-adoption period. There is the need to conduct a study in Nigeria with longer period of analysis. This might make the findings more convincing. Fourthly, the use of the D-in-D research design in all the reviewed Nigerian studies is absent. Current research on the effects of IFRS adoption on FRQ around the world currently use D-in-D regression analysis, because of its ability to test the effect of pre- and post-IFRS adoption on FRQ of different treatment groups under study. That is testing the treatment effect of a policy change like the mandatory IFRS adoption. Therefore, there is also the need to consider the use of the D-in-D research design for a Nigerian study to bridge the gap in the existing literature. Lastly, none of the Nigerian studies uses credit relevance metric as a measure of FRQ to test the effects of IFRS adoption on FRQ, thereby leaving a gap that needs to be filled. To fill these gaps in existing literature on IFRS adoption and credit relevance quality, this current study formulates a hypothesis on credit relevance as a measure for relevance quality of financial reporting, considering financial and non-financial data as control variables, longer period of analysis of eight years, division of DMBs as mandatory adopting banks and voluntary adopting banks with all quoted and unquoted banks combined together and use of the D-in-D research design. The period of analysis intends to cover 2009–2011 (three years) as pre-IFRS adoption period and 2012–2016 (five years) as post-IFRS adoption period. Credit relevance model as a measurement of relevance quality of financial reporting has not been used in any Nigerian IFRS adoption study as far as the literature of this study is concerned. Therefore, it creates a gap in the present literature in the area of IFRS adoption and FRQ in Nigeria. This current study will use credit relevance metric as a measurement for relevance quality of financial reporting to fill the gap in the present empirical literature. This is justified by the research of Florou et al. (2017), and Kosi et al. (2010) and the process credit rating by credit rating agencies, which involves considering financial reports. The financial reports of a company are the bases for the analysis done by credit rating agencies. Such analysis is expected to take cognizance of the financial reporting framework used in preparing the financial reports of the company. Understanding the impact of financial reporting framework such as IFRS is very important in the process of financial analysis (S&P’s Rating Services, 2008). This also leads to the development of the hypothesis of this study. H1. Mandatory IFRS adoption has no significant effect on credit relevance quality of financial reporting of DMBs in Nigeria. 2.3 Theoretical framework There are different assumptions, motivations and philosophies explaining the adoption of IFRS by countries, encapsulated as theories influencing IFRS adoption by this study. Several theories influence the adoption of IFRS by countries, but the one adopted by this study is discussed here. That is the decision-usefulness theory. The decision-usefulness theory was propounded in 1966 by the American Accounting Association (AAA) Committee to prepare a statement of the basic accounting theory (American Accounting Association. Committee to Prepare a Statement of Basic Accounting Effect of IFRS on credit relevance AJAR Theory, 1966). According to the Committee, decision usefulness of financial reporting information to users is the best postulate to use in choosing a measurement method in financial reporting. Dandago and Hassan (2013) describe the decision-usefulness theory as an approach usually adopted to satisfy the information requirements of the primary users of the financial reports of the reporting entities, who are investors and creditors. The decisionusefulness theory tries to build up an empirical and unbiased technique that will aid in the selection of the optimum choices of accounting measurements and disclosures by standard setting bodies. The theory affirms that good FRS are those that give the right financial reporting information that will aid users make informed decisions. 3. Research design and methodology This study uses a control sample of voluntary IFRS adopting banks and uses a D-in-D design to examine the effect of mandatory IFRS adoption on value relevance as used by similar studies (Chen et al., 2015; De George, 2013; den Besten et al., 2015; Doukakis, 2014; Florou et al., 2017; Hong et al., 2014; Li and Yang, 2016; Mazboudi, 2012; Ta, 2014). The D-in-D design is a quasi-experimental research design used to understand the effect of a change in the economic environment, such as IFRS adoption for corporate economic players or government policy, such as enactment of statutes (Roberts, 2009). According to prior studies, the D-in-D approach is suitable when testing the effect of a sharp change in financial reporting framework, such as mandatory IFRS adoption (L. Chen et al., 2015; Doukakis, 2014) or Sarbanes–Oxley Act 2002 in the USA (Cohen et al., 2008) on FRQ. This should have two groups of cross sections (control and treatment groups) and two time periods of before the change in the financial reporting framework and after the change in the financial reporting framework. Applying D-in-D to this study, DMBs are divided into two groups; treatment group tagged mandatory adopting banks and control group tagged voluntary adopting banks. Whereas, IFRS adoption periods constitute 2009–2011 as the premandatory IFRS adoption period and 2012–2016 as the post-mandatory IFRS adoption period. Having a control sample group of voluntary adopting banks and mandatory adopting banks (treatment sample group) from the same industry, such as DMBs has the advantage of likeness in firm-level characteristics as required by D-in-D assumptions. Therefore, there is homogeneity in the cross sections. Voluntary adopting banks as the benchmark sample does not prevent finding the effect of mandatory adopting banks post-mandatory IFRS adoption. In essence, mandatory IFRS adoption does not imply a significant change in voluntary adopting banks’ financial reporting practice (Doukakis, 2014). This satisfies the parallel trend assumption between the treatment and control group. The population of this study constitutes all listed and significant public interest entities (PIEs), other public interest entities (OIEs) and small- and medium-scale enterprises (SMEs) that are enumerated in the Roadmap to IFRS Adoption in Nigeria to transit and adopt to IFRS within 2010–2014. However, the research sample of this study consists of the companies under the significant PIEs group. DMBs are significant PIEs because they are mostly quoted on the floor of the Nigerian Stock Exchange (NSE) and are all regulated by CBN. Therefore, they were all expected to fully mandatorily adopt IFRS by 2012 reporting year. The sample is arrived at after applying purposive sampling technique (Kothari, 2004). Considering data availability requirement, the study arrives at the final test sample size of 128 bank-year observations (16 banks and eight years’ sample period). This is made up of 48 observations in the pre-mandatory IFRS adoption period and 80 observations in the post-mandatory IFRS adoption period. The type of data for this study is panel data on DMBs for the sample period of 2009–2016. These data are financial reporting data obtained from secondary sources, which are published internal and external documents on DMBs financial reporting system. The internally published documents are annual report and accounts of DMBs and other related information from the banks. The external documents include NSE Fact Book. The reputation and recognitions of both internal and external secondary sources (organisations) enhance the reliability and suitability of the data obtained for this study. Following prior research (Florou et al., 2017; Kosi et al., 2010), credit relevance, being the dependent variable is proxied by S&P credit rating. But, this study refines the credit relevance metric by deflating the S&P credit ratings of Nigeria by Q test scores of each bank for the period 2009–2016. Putman et al. (2005) develop an earnings quality metric called Q test, which focuses on how corporate earnings drive corporate value to determine earnings quality using ratios. Credit relevance is the capability of numbers in the financial statements to explain the credit rating of a company (Hann et al., 2007; Kosi et al., 2010), while Q test figures are scores based on the numbers in the three main financial statements. This study interprets the differences in the model’s explanatory power between pre- and post-mandatory IFRS adoption as evidence of differences in credit relevance (Hann et al., 2007; Jorion et al., 2009). The Q test scores are calculated based on the Putman et al. (2005) model in Eqn 1: Q Test ¼ 10ðCFO=RevÞ þ ðCFO=PBITÞ þ ðCOI=NIÞ þ 10ðCFO=TLÞ þ ðΔRev=ΔARÞ (1) where: 10(CFO/Rev) 5 Cash flow margin, which is arrived at after dividing cash flow from operations by sales of the same year then multiply by 10. CFO/PBIT 5 Operating cash ratio, which is arrived at after dividing cash flow from operations by profits before interest and tax for the same year. COI/NI 5 Repeatable earnings ratio, which is arrived at after dividing income from continuing operations by net income for the same year. 10(CFO/TL) 5 Leverage ratio, which is arrived at after dividing cash flow from operations by total liabilities of the same year then multiply by 10. ΔRev/ΔAR 5 Receivables accruals ratio, which is arrived at after dividing change in gross revenue by change in account receivables for the same year. If IFRS financial reports have higher credit relevance than Nigerian GAAP financial reports, then we expect an increase in the explanatory power of the credit rating model from the pre- to the post-mandatory IFRS period. The comparative changes (effects) in credit relevance of financial reports in the pre- and post-mandatory IFRS adoption periods of the treatment group of banks is estimated using the D-in-D regression. The first variable of interest of this study is MANDATORY, a dichotomous variable that takes the value of 1 for banks that did not apply IFRS until compliance became mandatory in 2012. The second variable of interest is POST, a dichotomous variable that equals 1 for observations from 2012. Lastly, the most important variable of interest that is expected to capture any incremental change in credit relevance quality for mandatory IFRS adopting banks is MANDATORY*POST, which is the interaction term in the model. However, prior studies (Alsaqqa and Sawan, 2013; Barth et al., 2008; Beest et al., 2009; Blanchette et al., 2012; Chen et al., 2015; den Besten et al., 2015; Doukakis, 2014; Ebrahimi Rad and Embong, 2014; Iyoha, 2011; Jeroh and Okoro, 2016; Mohammed and Lode, 2015; Okpala, 2012; Omokhudu and Ibadin, 2015; Onalo et al., 2014a, 2014b; Saidu and Dauda, 2014; Sarea and Al Nesuf, 2013; Tanko, 2012) document that credit relevance is affected by factors such as return on equity (ROE), revenue (REV), deposit liabilities (DEP), loan loss provision (LLP), bank size (SIZE), leverage (LEV), interest coverage (COV), big 4 auditing firms (BIG4), going concern statement, (GOING) and foreign direct investment (FDI). These factors are the Effect of IFRS on credit relevance AJAR financial and non-financial control variables, which are firm- and country-level attributes to be included in the models. The models to be tested for the hypotheses stated earlier are specified here based on the D-in-D design. This model is specified in Eqn 2, and the variables are defined in Table A1: C RATINGit ¼ β0 þ β1 MANDATORYit þ β2 POSTit þ β3 MANDATORYit 3 POSTit þ β4 ROEit þ β5 LLPit þ β6 SIZEit þ β7 LEVit þ β8 GOINGit þ β9 FDIit þ εit (2) 4. Result and discussions 4.1 Results Table I presents the descriptive statistics of the model variables and their statistical differences between the pre- and post-mandatory IFRS adoption period. Table I presents the descriptive statistics of the model variables and their statistical differences between the preand post-mandatory IFRS adoption period. Panel A in Table I presents the descriptive statistics of voluntary adopting banks, being the control group of the D-in-D design. In Panel A in Table I, the means of the dependent variable, credit rating is not significantly different across the pre- and post-mandatory IFRS adoption period. In Panel B of Table I, credit rating also presents a non-significant difference in their means between the pre- and post-mandatory IFRS adoption period. This means that the mandatory IFRS adoption by these bank has not changed the banks credit relevance of financial reporting when comparing their means. Table II reports the results of the D-in-D regression model for mandatory IFRS adoption and credit relevance in the Nigerian DMBs. This is to test the hypothesis (H1) for this study. Table II presents the D-in-D regression results with a fitted model (chi-square p-value 5 0.0634) at 0.1 level of significance. In Table II, the coefficient of MANDATORY*POST is positive and significant at the 0.05 level of significance. This suggests an increase in credit relevance for mandatory adopting banks from the pre- to post-mandatory IFRS adoption period. Table II also shows that there is a significant difference between the pre- and post-mandatory adoption period for credit relevance with POST p-value of 0.025. Variable Pre-mandatory adoption Obs Mean Std. dev. Post-mandatory adoption Obs Mean Std. dev. Panel A: descriptive statistics of voluntary adopting banks C_rating 12 0.0246 0.1008 20 0.1884 Llp 12 0.9658 0.6032 20 1.4555 Size 12 8.3733 0.2414 20 8.572 Lev 12 0.0358 0.0294 20 0.071 Going 12 0 0 20 0.35 Fdi 12 0.1567 0.0098 20 0.226 Table I. Descriptive statistics Panel B: descriptive statistics of mandatory adopting banks C_rating 36 0.0417 0.3362 59 0.0262 Llp 36 1.2553 2.5805 59 0.8532 Size 36 7.8822 0.3807 60 7.8335 Lev 36 0.1125 0.2575 60 0.073 Going 36 0 0 60 0 Fdi 36 0.1567 0.0096 60 0.226 Source: Authors’ computation using STATA (2018) Group difference Mean diff t-statistics p-value 1.1057 2.4366 0.2508 0.0459 0.4894 0.0704 0.1638 0.4897 0.1987 0.0352 0.35 0.0693 0.658 0.8561 2.2208 2.6424 3.1986 4.3362 0.5182 0.4009 0.0360 0.0130 0.0047 0.0003 0.1171 1.1627 0.4034 0.0476 0 0.0692 0.0679 0.4021 0.0487 0.0395 0 0.0693 1.1696 0.8818 0.5936 0.9111 7.6441 0.2490 0.3827 0.5545 0.3682 0.0000 Random-effects GLS regression Group variable: banknum R2 Within Between Overall Corr(u_i, X) C_rating Mandatory Post Mandatory*post Llp Size Lev Going Fdi _Cons Sigma_u Sigma_e Rho Number of obs Number of obs group 127 16 Obs per group Min Avg M.ax Wald χ 2 (14) Prob > χ 2 0.0960 0.1040 0.0905 0 (assumed) Effect of IFRS on credit relevance 7 7.9 8 11.73 0.0634 Coefficient Standard error z p>z 95% Confidence interval 0.07605 0.4496 0.4432 0.0327 0.1973 0.1725 0.5119 1.1168 1.8260 0 0.46710136 0 0.1692 0.2001 0.2181 0.0243 0.1233 0.3024 0.2283 0.8239 1.0669 0.45 2.25 2.03 1.35 1.60 0.57 2.24 1.36 1.71 0.653 0.025 0.042 0.177 0.109 0.569 0.025 0.157 0.087 0.2555 0.8418 0.0157 0.0803 0.0443 0.4203 0.0644 0.4979 3.9171 0.4076 0.0574 0.8706 0.0148 0.4388 0.7652 0.9594 2.7315 0.2652 (Fraction of variance due to u_i) Analysing the overall D-in-D model, 9.05 per cent of the variability in credit relevance quality of financial reporting are influenced by both the test and control variables within the pre- and post-mandatory IFRS adoption period. The variables in the model that show a significant effect of mandatory IFRS adoption on credit relevance quality of financial reporting at both 0.05 and 0.1 levels of significance include POST MANDATORY*POST and GOING. To test the hypothesis (H1), the p-value of the test variable MANDATORY*POST in Table II is used. The p-value of the interactive term (MANDATORY*POST) is 0.042 at 0.05 level of significance; therefore, the null hypothesis (H1) is rejected. Meaning that mandatory IFRS adoption has a significant and positive effect on credit relevance quality of financial reporting of DMBs in Nigeria. In other words, the study finds a significant increase in credit relevance after the mandatory IFRS adoption in the Nigerian DMBs. 4.2 Discussions The results of the D-in-D econometric analyses have shown that mandatory IFRS adoption has effect on credit relevance quality of financial reporting of deposit money banks in Nigeria. The effect of mandatory IFRS adoption on credit relevance was tested using the significance of the D-in-D coefficients. Following the decision-usefulness theory, this study finds a positive effect of mandatory IFRS adoption on credit relevance quality of financial reporting based on the fundamental qualitative characteristics (relevance) as highlighted in the IFRS “Conceptual Framework for Financial Reporting”. The finding of this study is in the same direction with the a priori expectation and other studies (Chan et al., 2013; Florou et al., 2017; Kosi et al., 2010; Lima et al., 2016). The finding contradicts the negative IFRS effect results of the study of Dang et al. (2017). The implication of this finding is that credit relevance of DMBs that mandatorily adopted IFRS in 2012 increases after the mandatory adoption. The results of this study are significant to provide the basis for investment decisions by the Nigerian and foreign investors in the Nigerian Table II. D-in_D regression results AJAR banking system after mandatory IFRS adoption in that sector. Regulatory authorities, such as CBN, Security and Exchange Commission and FRC of Nigeria ensure that any financial reporting framework adopted or developed should bring out the quality in the financial reporting. The results in this study have provided these regulatory institutions with an empirical evidence of the positive effect of mandatory IFRS adoption on the quality of financial reporting. The Roadmap for the Adoption of IFRS in Nigeria as announced in the year 2010 by the Federal Executive Council and the subsequent promulgation of the FRC of Nigeria Act 2011 were aimed at improving the quality of financial reporting of PIEs in Nigeria. This study again has provided the empirical evidence that the aim of the Roadmap for the Adoption of IFRS in Nigeria was achieved in terms of credit relevance quality of financial reporting in Nigeria. 5. Conclusion and recommendations It is established in this study that mandatory IFRS adoption has effect on credit relevance quality of financial reporting of DMBs in Nigeria. However, the difference in the credit relevance quality of financial reporting of mandatory adopting banks in the post-mandatory IFRS adoption period compared to pre-mandatory IFRS adoption period is not material. In essence, this implies that the credit relevance of DMBs in Nigeria increases after the mandatory IFRS adoption in 2012. Quality test (Q test) of banks was used to deflate credit ratings, and Q test is computed based on financial reporting numbers, which are affected by IFRS adoption. This study provides the fact that credit relevance is influenced by IFRS-based financial reporting numbers. However, lack of much differences in the credit relevance between voluntary and mandatory adopters in the pre-mandatory IFRS adoption period contradict the notion and a priori expectation that there ought to be a material difference. This is because of willingness of the voluntary adopters to take advantage of the benefits of IFRS adoption and not coerced into the adoption. To enable the study achieve its significance, the following recommendations arising from the findings and conclusions are provided: (1) Despite the statistically significant and positive effect of mandatory IFRS adoption on credit relevance quality of financial reporting as in this study, regulatory authorities should encourage DMBs to avail their financial reports annually to credit rating agencies (local and international) for proper evaluation for subsequent ratings. This would open more opportunities for the Nigerian DMBs in the global financial markets as they are applying the globally accepted FRS. 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Appendix Expected IFRS effect Effect of IFRS on credit relevance Variable Code Definition Test variables: Mandatory adopting banks MANDATORY 1 if bank did not use IFRS until it became mandatory, and 0 otherwise 1 for observations from 2012, and 0 otherwise þ Chen et al., 2015; Doukakis, 2014 þ Chen et al., 2015; Doukakis, 2014 1 for mandatory adopting bank in the post-adoption period, and 0 otherwise þ Chen et al., 2015; Doukakis, 2014 Firm-level attributes: Profitability ROE Return on equity þ Liquidity LLP LLP per share  Capital structure SIZE Bank size as natural log of market value of equity þ LEV Leverage as a % of fixed interest capital to total capital 1 if bank’s financial report has going concern statement, and 0 otherwise  Doukakis, 2014; Sarea and Al Nesuf, 2013 Mohammed and Lode, 2015; Onalo et al., 2014a, 2014b Barth et al., 2008; den Besten et al., 2015; Devalle et al., 2010; Onalo et al., 2014a, 2014b; Tanko, 2012 Barth et al., 2008; den Besten et al., 2015; Tanko, 2012 Beest et al., 2009; Braam and Beest, 2013; Mbobo and Ekpo, 2016 Foreign direct investment as a % RGDP þ Pre- or postmandatory adoption period Interaction term POST MANDATORY *POST Source Control variables: Corporate governance GOING Country-level attributes Globalisation FDI þ Okpala, 2012; Saidu and Dauda, 2014 Source: Authors’ compilation (2017) Corresponding author Dagwom Yohanna Dang can be contacted at: dagwom2011@gmail.com For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: permissions@emeraldinsight.com Table A1. Definition of independent variables The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/0268-6902.htm Corporate governance and compliance with IFRS 7 Compliance with IFRS 7 The case of financial institutions listed in Canada Yosra Mnif High Institute of Business Administration, University of Sfax, Sfax, Tunisia, and Oumaima Znazen Received 23 August 2018 Revised 12 May 2019 24 October 2019 13 December 2019 Accepted 18 December 2019 Faculty of Economics and Management, University of Sfax, Sfax, Tunisia Abstract Purpose – This paper aims to investigate the impact of the characteristics of two corporate governance mechanisms, namely, board of directors and audit committee (hereafter AC), on the level of compliance with International Financial Reporting Standard [hereafter International Financial Reporting Standards (IFRS)] 7 “Financial instruments: Disclosures” (hereafter FID). Design/methodology/approach – Using a self-constructed checklist of 128 items, this research measures the compliance with IFRS 7 of 63 Canadian financial institutions listed on the Toronto Stock Exchange during a period of three years (2014-2016). Fixed effect panel regressions have been used to capture the individual effect present in authors’ data. Findings – Empirical results show that the mean compliance level with IFRS 7 requirements is about 77 per cent and identify various areas of non-compliance. This level of compliance has a positive linkage with the board size and independence. Similarly, the AC independence and financial accounting expertise are shown to positively affect authors’ dependent variable. Nevertheless, CEO/chairman duality, AC size and meeting frequency are not significantly correlated with the level of compliance with IFRS 7. Originality/value – This study expands prior compliance literature in the Canadian setting by examining the determinants of compliance with IFRS mandatory disclosures. Also, and to the best of the authors’ knowledge, this paper is among the first studies that have investigated the effect of corporate governance characteristics (hereafter CGC) on compliance with all IFRS 7 requirements in general. Keywords Determinants, IFRS 7, Corporate governance, Compliance, Financial instruments, Canadian financial institution Paper type Research paper 1. Introduction The rapid growth of financial markets globalization has accelerated the demand for internationally comparable financial reporting. Since it has been founded in 1973, the role of accounting harmonization has been entrusted to the International Accounting Standards Committee (IASC), which became the International Accounting Standards Board (IASB) in 2001. Despite the efforts of this international standard setter, the extent to which companies concretely comply with International Financial Reporting Standards (IFRSs) requirements is The authors would like to thank the anonymous reviewers and the editors for their valuable comments and suggestions to improve the quality of the paper. Managerial Auditing Journal © Emerald Publishing Limited 0268-6902 DOI 10.1108/MAJ-08-2018-1969 MAJ still debatable. In this regard, many researchers have granted a great deal of attention to the issue of compliance with international accounting standards (IASs) in both developed countries context (Tsalavoutas, 2011; Glaum et al., 2013; Bepari and Mollik, 2015; Mazzi et al., 2017) and emerging countries context (Akhtaruddin, 2005; Al-Shammari, 2011; Alfraih, 2016; Mnif and Tahari, 2017). Although it has adopted IFRS since 2011, Canada stills an understudied setting. In response to the feedbacks that claim the improvement of disclosures effectiveness, the IASB launched its Disclosure Initiative in 2013. Currently, the board has four projects linked to materiality implementation and to principles and standard level review of disclosure. In fact, the board has identified three disclosure problems which are not enough relevant information which may lead to inappropriate decisions; irrelevant information which may obscure relevant information and ineffective communication which may reduce the understandability of financial statements. Thus, the materiality project aims at responding to the concerns of not enough relevant information by providing guidance to judge whether accounting transaction/ item is material. Notwithstanding, the principles of the disclosure project tend to respond to the concerns of irrelevant information and ineffective communication by providing guidelines to apply better judgement and communicate information more effectively. This paper aims to participate in this debate by examining the extent of compliance with a critical standard that is IFRS 7. After the adoption of FI standards, many investigations have been conducted in the field (Lopes and Rodrigues, 2007; Hassan et al., 2008; Strouhal, 2009; Murcia and Santos, 2010). Globally, there is wide evidence of issues in the accounting for financial instruments (FI), and there is a persistent need to improve the understanding and the knowledge of the standards (Sara and Dalal, 2015). In this connexion, Larson and Street (2004) classify IAS 39 “Financial Instruments: Recognition and Measurement” among the most complicated standards requiring a difficult implementation by companies. Recently, accounting for FI has attracted tremendous attention because of the enormous growth of the derivative FI markets (Amoako and Asante, 2012). This growing concern is also because of the wave of financial crisis in which accounting for FI has been directly involved (Barth and Landsman, 2010; Jarolim and Öppinger, 2012). Likewise, the Association of Chartered Certified Accountants (ACCA, 2011) reveals that standards for FI contributed to, and may be exacerbated, global financial crisis.This argument presents a strong motivation for this study. Corporate scandals around the world have emphasized, once again, the need for the practice of good corporate governance. As defined by the Organization for Economic Corporation and Development (2004), corporate governance (hereafter CG) is a set of relations between a company’s management, its board, its shareholders and other stakeholders. In this connection, a global investor opinion survey conducted by McKinsey and Company (2002) affirms that governance remains a concern for investors and reveals that it is particularly important compared to financial indicators. In our study, we put forward two principal CG mechanisms which are BD and AC. Consequently, there has been a growing recognition of CG role in enhancing financial reporting quality (Verriest et al., 2012). In fact, recent compliance studies witnessed increasing attention to the relationship between CG and compliance with IFRS requirements (Abdullah et al., 2015; Bepari and Mollik, 2015; Juhmani, 2017). However, the majority of prior research related to compliance with IFRS 7 has reported low levels of compliance (Jobair et al., 2014; Zango et al., 2015; Mnif and Tahari, 2017) without examining such association. It should be noted that even though Tauringana and Chithambo (2016) and Agyei-Mensah (2017) have examined the impact of some CG mechanisms on the extent of compliance with IFRS 7, their studies were restricted to risk disclosure requirements. Our paper aims to fill this gap in the literature by examining whether CGC affects the degree to which Canadian financial firms comply with IFRS 7. The importance of this research stems from the following factors. First, Canada presents a unique understudied setting because it is the only G7[1] member country among all non-European members that have mandatorily adopted IFRS. This uniqueness is heightened also by the fact that Canada has been tending to adopt the United States Generally Accepted Accounting Principles (US GAAP) rather than IFRS for several years (Nobes, 1983). Second, before the IFRS adoption in Canada, the rules and regulations on accounting for FI and particularly on risk disclosures tended to be sparse (Jeffrey, 2012 with reference to the chair of Canada’s Accounting Standards Board). In this connection, Maingot et al. (2013) argued that the voluntary risk disclosures under the Canadian National Instrument 51-102 were entirely subject to management discretion. Hence, it would be interesting to measure the extent of these disclosures that became mandatory after the IFRS adoption. Third, Canada has a principles-based governance structure under which regulators suggest rather than mandate governance principles. But Canadian regulators have surprisingly made the exception for AC and mandate the rules of compliance. Thus, it would be relevant to study the effectiveness of this specific CG environment. Finally, Bischof (2009) affirms that even though IFRS 7 applies to all entities engaged in FI, it has a specifically strong effect on the banking industry. Likewise, Okafor et al. (2016) state that it would be interesting to investigate compliance with IFRS in Canada because, as reported by Bank of Canada 2013, its financial system was relatively strong during the period of global financial crisis. The World Economic Forum, 2016-2017 ranked Canada’s banking system as the third soundest in the world. Also, Canada’s financial services sector has been a source of growth for the economy over the past decade as it directly accounts for and 7.1 per cent of Gross Domestic Product (hereafter GDP) in Canada. These statistics give a strong importance to our research being focused on Canadian financial institutions. We conduct this study using a sample of 63 financial institutions listed on the Toronto Stock Exchange (TSX) from 2014 to 2016, and we measure their compliance with IFRS 7 requirements. To do so, we hand-collect firms’ annual reports, and we use a self-constructed checklist of 128 items to compute the compliance level for our sampled companies. We find that financial institutions in Canada comply only with 77 per cent of IFRS 7 requirements. To examine the impact of the BD and/or the AC characteristics on IFRS 7 compliance level, we have estimated three regression models. After controlling for corporate size, leverage, profitability, the auditor’s type, the report readability as well as board and AC gender diversity, we find that FID is higher when a firm has a larger and more independent board. We also find that the more the AC is independent and has more financial accounting experts the more the firm complies with IFRS 7 requirements. However, we document that CEO/ chairman duality, AC size and AC meetings have no significant effect on our dependent variable. These findings make several important contributions. First, this paper highlights that the compliance issue is pertinent even in developed markets with high enforcement. Moreover, our findings contribute to the existing compliance literature by providing further empirical evidence about the accounting for FI issue. Our results underscore also the important role of the board and the AC as corporate governance mechanisms in the IFRS implementation. More precisely, based on the agency theory, this paper is among the first known empirical evidence focusing on the links between all IFRS 7 mandatory disclosures and these corporate governance mechanisms. Furthermore, the outcomes of this research may be of importance for the national as well as the international community, and specifically for the stakeholders of the Canadian capital market who are keen to know the Compliance with IFRS 7 MAJ weaknesses and the strengths in FI disclosure practices. In addition, the findings of this paper are not only of interest to current and potential investors but also can provide the Canadian regulators and policymakers with recent evidence that may help them to assess the CG enforcement status in their market and therefore to adopt new approaches to overcome enforcement weaknesses. Finally, the present study may be useful for the standard setters who continue to rigorously review all the disclosure issues reported by the IFRS users. Thus, our results may contribute to informing IASB debates on mandatory disclosures, and particularly its Disclosure Initiative (2013) discussed above, about the relatively low levels of compliance with FID. The remainder of this paper is structured as follows. At first, in Section 2, we provide an overview of the implementation of the financial reporting environment in Canada and that of IFRS 7. Subsequently, in Section 3, we present a literature review and hypotheses development. Then, in Section 4, we outline the research methodology. In Section 5, we present and discuss the main empirical findings of this paper. Finally, in Section 6, we end up drawing a brief conclusion. 2. Institutional background In what follows, we briefly introduce the Canadian financial reporting environment. Then, we present an overview of the implementation of IFRS 7 in Canada. 2.1 The financial reporting environment in Canada Canada has a highly developed economy with the tenth-largest GDP in the world (World Bank Data, 2015). Since 1976, Canada was invited to join the six most powerful economies in the world (France, Germany, Italy, Japan, the UK, and the USA) and to form the G7 group. Furthermore, the Canadian nation is characterized by a particular mixed economic system that combines market and command systems. Regarding the financial reporting system, firms were historically applying the Generally Accepted Accounting Principles of Canada elaborated by the Canadian Accounting Standards Board (AcSB), before the adoption of IASs. The decision of AcSB to require publicly accountable companies to adopt IFRSs was deliberated at length. In fact, Nobes (1983) reveals that Canada was tending towards harmonizing with the US GAAP. As reported by Accounting Standards Board (2011, p 1), “In 2004, the AcSB had a dual strategy of harmonizing with US generally accepted accounting principles (GAAP) while working to support the international convergence of accounting standards”. But finally, Canada decided to adopt IFRS via a five-year strategic plan for the period 2006-2011, rather the adoption of US GAAP. In January 2011, Canada became the first G7 nation outside the European countries to join the community of nations that permit or require IFRSs for preparing financial statements. The passage of Sarbane Oxley (SOX) has motivated Canadian regulators to review their own governance standards and to provide some long overdue changes. Canada’s corporate governance system is derived from the British common law model. This system is shaped by legal rules and best practices promoted by institutional shareholder groups, the media and professional director associations. Indeed, the area of CG in Canada is piloted by two major organizations (Calkoen, 2017). The first is the Canadian Coalition for Good Governance, a group of 52 members including the largest institutional investors, formed to represent shareholders interest and to promote good governance practices in Canadian public companies. The second is the Canadian Securities Administrators (CSA) defined as a group composed of the ten provincial regulators and seen as the editor of many national instruments for good practices. For instance, the national policy 58-201 (2020) “Corporate Governance Guidelines” (NP 58-201) is effective from 2005 and suggests, among others, the board composition, meetings, mandate and responsibilities. The National Instrument 52-110 “Audit Committees” (NI 52-110) has become effective since 2008 and mandates the AC composition and responsibilities. This requirement is surprising because it veers away from a principles-based rules governance structure. 2.2 The implementation of IFRS 7 IFRS 7 was originally issued in August 2005 and was applied for annual periods beginning on or after 1 January 2007. This standard places emphasis on disclosures about FI which are defined as any contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity. In fact, the standard is divided into two main concerns. The first deals with the significance of FI for financial position and performance, and the second is related to qualitative and quantitative disclosures that indicate the nature and extent of risks arising from FI to which the entity is exposed. Since 2008, the present standard has been subject to several amendments. In fact, this standard is closely related to IAS 39: “Financial Instruments: Recognition and Measurement” being widely criticized for its complexity. In response to the claims of financial statements users, the IASB published a discussion paper “Reducing Complexity in Reporting Financial Instruments”, in September 2008. In the light of this matter, the IASB has started the project of the issuance of IFRS 9 aiming at simplifying the accounting for FI. This reform concerns three aspects of FI which are classification and measurement, impairment accounting and hedge accounting. On 24 July 2014, the IASB issued the final version of this standard. After 01 January 2018, IFRS 7 requirements are totally amended under IFRS 9 dispositions. 3. Literature review and hypotheses development On the one hand, prior research suggests that CG mechanisms are directly associated with the firms’ financial reporting (Carcello et al., 2006; Cohen et al., 2013; Abdullah et al., 2015). In fact, the agency theory, which relates agency problems to unaligned goals or different risk aversion levels between shareholders (principals) and company executives (agents), provides the theoretical basis for CG research (Jensen and Meckling, 1976). More particularly, there is an ongoing debate as to whether better CG leads to higher compliance with IAS/IFRS requirements. The effect of the AC and the board effectiveness has been the main focus of recent compliance literature. For instance, when examining the effect of AC effectiveness, Bepari and Mollik (2015) find that compliance with IFRS for goodwill impairment is significantly associated with AC members’ accounting and finance backgrounds. In this connection, Sellami and Fendri (2017) have examined the effect of AC characteristics on compliance with IFRS for related party disclosures in the South African context. These authors find that the compliance level is positively influenced by AC independence and accounting expertise. Additionally, they report that AC members with both industry and financial accounting expertise enhance the level of compliance with ISA 24 more importantly than do AC members with financial accounting expertise only. Nevertheless, the AC size, meeting frequency and industry expertise do not affect the disclosure level. With regard to the impact of board effectiveness, Alfraih (2016) shows that compliance with IFRS requirements by Kuwaiti firms is positively associated with the board size, gender diversity and multiple directorships. Similarly, Juhmani (2017) finds that the level of Bahraini corporate compliance with IFRS mandatory disclosures is positively linked to the board independence but negatively associated with CEO/chairman duality. Compliance with IFRS 7 MAJ On the other hand, while the disclosures for FI have been broadly investigated by extant literature, the majority of these studies report relatively low levels of compliance. Regarding compliance with IAS 39, Cascino and Gassen (2015) find that the compliance levels are about 46 per cent in Germany and 69 per cent in Italy. In their research, Al Mutawaa and Hewaidy (2010) and Rajhi (2014) report intermediate compliance levels with IAS 32 “Financial Instruments: Presentation” of 75 per cent in Kuwait and 71 per cent in France. Similarly, Lopes and Rodrigues (2007) reveal that Portuguese firms comply with IAS 39 and IAS 32 at only 44 per cent. Focusing particularly on compliance with IFRS 7 by Bahraini banks, insurances and investment firms, Sarea and Dalal (2015) find a reasonable level of disclosures over 80 per cent in all sectors. However, they affirm that there are problems in the accounting for FI and highlight the need to improve the understanding of that standard. In the same vein, Jobair et al. (2014) report that Bangladeshi banks comply with only 55 per cent of IFRS 7 requirements and address strict recommendations for concerned parties. Subsequently, Atanasovski (2015) indicate that compliance with IFRS 7 by listed firms in Macedonia is only related to the auditor’s type and ownership concentration. In recent papers, Tauringana and Chithambo (2016) and Agyei-Mensah (2017) have extended the existent literature on IFRS compliance by examining whether CG attributes have any significant impact on the level of compliance with IFRS 7 in Malawi and Ghana. However, the focus of these researchers has been only based on risk disclosure requirements. Given the reasons above, our study goes further these studies by testing the impact of CGC on the compliance with all the requirements of IFRS 7 by financial institutions in a developed economy. 3.1 Board size The BD plays an important role the entities’ corporate governance. John and Senbet (1998) affirm that the board size is an important control mechanism to reduce agency problems arising from conflicts of interest between managers and shareholders. In fact, prior research argues that larger boards tend to have a greater diversity of business and financial expertise and are more effective in control. Therefore, they are more willing to enhance the quality of the company’s financial reporting and corporate disclosure (AlShammari, 2014). More precisely, Alfraih (2016) suggests that the more the number of directors increases the more their combined experience and qualifications improve, which enhances compliance with IFRS 7 disclosures. Hence, such expertise may mitigate the standard difficulties and enhance therefore the disclosure level. Furthermore, Fama and Jensen (1983) theorize that the board can play an important role in making strategic decisions. In this regard, Agyei-Mensah (2017) states that managing risk is a critical consideration for the BD. Because the risk disclosures present the second stream of IFRS 7, it is expected that the BD affects the quantity and the quality of that disclosures level. In the compliance literature, some empirical studies find a positive relationship between the extent of mandatory disclosure and the board size (Kent and Stewart, 2008; Alfraih, 2016). In accordance with these researchers, the following hypothesis is tested: H1. Board size is positively associated with compliance with IFRS 7. 3.2 Board independence To explain the importance of board independence, researchers are almost referring to agency theory (Haniffa and Cooke, 2002). Indeed, Lim et al. (2007) suggest that the presence of independent non-executive directors on the board works as a mechanism to reduce information asymmetry between the managers and the owners. In this connexion, Song and Windram (2004) state that board independence lessens the level of both financial reporting problems and corporate fraud. Subsequently, Mnif and Slimi (2016) find that the percentage of independent outside directors has a significant influence on reducing discretionary accruals. In this perspective, the CSA, through the NP 58-201, sets out that the board should have a majority of independent directors. Regarding corporate financial disclosure, board independence is considered as a mechanism that can influence disclosure practices. In this perspective, Haniffa and Cooke (2002) affirm that an independent board leads to an increased quality of financial disclosures because a majority of non-executive directors can maximise the board’s ability to force management to respect all the required disclosures. Particularly, Tauringana and Chithambo (2016) suggest that because IFRS 7 aims to provide investors with information that enables them to evaluate the significance of FI for the firm’s financial position and performance, dependent directors will more likely encourage compliance with the disclosure guidelines. The findings of previous research support the positive influence of independent directors on mandatory disclosure compliance (Sellami and Fendri, 2017; Juhmani, 2017). In view of the above results, the following hypothesis is formulated: H2. Board independence is positively associated with compliance with IFRS 7. 3.3 CEO/chairman role duality The separation of the roles of CEO and board chair is another board characteristic associated with strong corporate governance. The agency theory asserts that this separation avoids the concentration of managerial power and improves the efficiency of control exercised by the board (Molz, 1988). In Canada, the NP 58-201 suggests that the chair of the board should be an independent director. As far as mandatory disclosure is concerned, Al-Shammari (2014) expects that firms with CEO duality disclose less information in their annual reports because their CEOs tend to be more opportunistic and more likely to maximise their benefits via withholding information to shareholders. Thereby, the separation of CEO/Chairman role means the separation between decision management and decision control (Fama and Jensen, 1983). This may enhance disclosures transparency and oblige managers to provide all mandatory FI disclosures. In the mandatory disclosure literature, Alfraih (2016) and Juhmani (2017) provide evidence that CEO/Chairman role duality has a negative and significant association with compliance with IAS/IFRS requirements. However, Kent and Stewart (2008) do not find any significant association. Accordingly, we test the following hypothesis: H3. CEO/Chairman role duality is negatively associated with compliance with IFRS 7. 3.4 Audit committee size According to Davidson et al. (2005), the AC is the main mechanism for providing shareholders with the greatest protection in maintaining the quality of a company’s financial reporting and to enhance compliance with mandatory disclosures. The AC size is claimed to be relevant to the effective discharge of its responsibilities (Kent and Stewart, 2008). In Canada, the NI 52-110 stipulates that an AC must be composed of a minimum of Compliance with IFRS 7 MAJ three members. Consistent with this claim, Anderson et al. (2004) argue that larger AC can be more effective as it has wider knowledge and greater variety of expertise. However, when the committee size becomes too large, it can suffer from performance’s decline because of the coordination and process problems (Jensen, 1993). Empirical findings on the relationship between the AC size and the level of the firm’s disclosure are mixed. While Kent and Stewart (2008) and Abdullah et al. (2015) show that AC size is negatively associated with the company’s disclosure level, Juhmani (2017) and Sellami and Fendri (2017) do not find any significant association between both variables. In light of these mixed results, the following hypothesis is proposed: H4. AC size is associated with compliance with IFRS 7. 3.5 Audit committee independence The Sarbanes–Oxley Act (2002) emphasizes the need for AC independence in monitoring financial reporting and requires the independence of all AC members. Along similar lines, the NI 52-110 states that all the committee members must be independent in the Canadian setting. In a similar vein, prior research exhibits the importance of AC independence in the effectiveness of the monitoring process. In fact, Klein (2002) shows that an AC composed in the majority of independent members is more able to resist against pressure from management and to view issues objectively. Moreover, Abdullah et al. (2015) suggest that an independent committee tends to enforce compliance with disclosure requirements as it would be better able to protect shareholders’ interests. According to Agyei-Mensah (2017), because firms become larger, diversified and complex, the responsibility of effective control and risk management become difficult for BD, and it is often delegated to employees. The occurrence of such a delegation needs the support of AC as a wide monitoring mechanism. Hence, more independent AC members are likely to accord greater attention to compliance with IFRS 7 risk disclosure requirements and reduce agency costs. In the mandatory disclosure literature, Abdullah et al. (2015) and Juhmani (2017) find support that the extent of compliance with IFRS requirements is positively associated with the AC independence. Hence, the following hypothesis is tested: H5. AC independence is positively associated with compliance with IFRS 7. 3.6 Audit committee meetings Even though the Canadian NI 52-110 does not address the minimum number of annual meetings, the frequency of AC meetings is another characteristic considered to be relevant to effectively accomplish its monitoring role (Karamanou and Vafeas, 2005). In this regard, Xie et al. (2003) suggest that an active AC is positively associated with the financial reporting quality as reflected by a lower level of earnings management. Likewise, Lin and Hwang (2010) report that ACs meeting regularly during the financial year may provide its members with sufficient time to perform their duties regarding monitoring their firms’ financial reporting process. Accordingly, we suppose that an active AC is more willing to exert a positive impact on disclosure scope and thus require therefore higher compliance with FID. Previous compliance studies report mixed results on the relation between AC meeting frequency and compliance with mandatory disclosures. Kent and Stewart (2008) show a favourable impact of the number of the AC meetings on the compliance level with mandatory disclosures in Australia. Nevertheless, Abdullah et al. (2015) and Sellami and Fendri (2017) do not find any significant association. Hence, the following hypothesis is formulated: H6. AC meetings are positively associated with compliance with IFRS 7. 3.7 Audit committee expertise The CG literature provides evidence that the AC financial expertise has a positive impact on the financial reporting quality (Carcello et al., 2006; Cohen et al., 2013). In addition, earlier studies suggest that the AC expertise is negatively related to fraud incidence (Abbott et al., 2004). The majority of prior papers define the AC expertise by the accounting and finance qualification of its members. Indeed, it has been argued that the finance and accounting backgrounds are crucial for the committee members to perform their duties well and to improve the AC effectiveness (Krishnamoorthy et al., 2002). Similarly, Abbott et al. (2004) argued that the expertise in accounting and finance of the AC directors is required given the complexity of accounting and auditing issues that may encounter the firms. In fact, because the accounting for FI is complex (Chalmers and Godfrey, 2000; Larson and Street, 2004), accurate disclosures for such instruments need expertise. In Canada, the NI 52-110 requires all the AC members to be financially literate. The financial literacy is defined by the instrument as: [. . .] the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the issuer’s financial statements., but seems very vague. Existing papers testing for the impact of AC expertise on the compliance level is extremely limited. While Bepari and Mollik (2015) and Sellami and Fendri (2017) show a positive significant association between compliance with IFRS requirements and AC expertise, Abdullah et al. (2015) do not find any significant relation between both variables: H7. AC expertise is positively associated with compliance with IFRS 7. 4. Research methodology 4.1 Sample and data collection The initial sample consists of all financial institutions listed on the TSX on 31 December 2016. Our research covers a period of three years (2014-2016). The selection of this period takes into account the most recent available data when conducting this study. First, following Bepari and Mollik (2015) and Sellami and Fendri (2017), we have excluded foreign companies as they are disclosing in different currencies and they are not obliged to comply with the Canadian national instruments. Then, we have removed firms with unavailable annual reports. After this screening, a total of 173 firm-year-observations have been analysed, consisting of 51, 59 and 63 observations in 2014, 2015 and 2016, respectively. To meet the objectives of this research, the annual reports of the selected financial institutions have been hand-collected from their official websites. The sample derivation and composition are described in Table I. It should be noted that, after obtaining a final sample of 173 observations, a materiality threshold was computed for each company to examine the significance of FID for that firm. In fact, the international standard setters are increasingly interested in the disclosure issue. Compliance with IFRS 7 MAJ Sample derivation Initial sample from TSX Removal of foreign companies Removal of companies with unavailable annual report Final sample Table I. Sample derivation and composition Sample composition Banks Asset management Insurance Credit service Brokers and exchange No. of companies 79 (3) (13) 63 17 23 11 7 5 Particularly, this concern is broadly discussed in the IASB project dealing with “Principles of Disclosure” in which the board aimed, among others, to provide guidelines for improving disclosure requirements. To explain the relatively low levels of compliance exhibited by previous literature, this international standard setter puts forward the argument that many of the IAS/IFRS requirements may not be disclosed because the corresponding accounting transactions/items are not material. Hence, in its “Materiality Practice Statement” project, the board is establishing a practice statement containing not-mandatory guidance to assess entities to make materiality judgements when preparing their financial statements. In response, many recent compliance research starts to apply the significance test with regard to the focus of their studies and the topic they are examining. For example, when examining the value relevance of the compliance level with IAS 36 “Impairment of Assets” by large sample of European companies, André et al. (2018) used a 5 per cent threshold of impairment over profit before tax to determine whether an impairment or a reversal of an impairment was regarded as material or not. Similarly, Mazzi et al. (2017) studied the association between compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital. The authors excluded all the observations with a threshold of goodwill to book value of equity that is below 5 per cent. In our case, we assessed the materiality of FIDs for financial Canadian firms using a 5 per cent threshold of FI to total assets. We obtain coefficients that range between 7.85 and 90.13 per cent with a mean value equal to 43.02 per cent. Therefore, none of the sampled firms is excluded. These results can be explained by the fact that FI constitute the principal components of a financial company’s balance sheet. 4.2 Dependent variable Following prior research (Al-Shammari et al., 2008; Glaum et al., 2013; Mazzi et al., 2017), a compliance index was computed for each company using a self-constructed checklist. Initially, a checklist for financial instruments was developed based on the text of the standard issued by the IASB. The information for which disclosure is not mandatory but encouraged by standard setters was also eliminated. Finally, giving that IFRS 7 subdivides disclosure requirements into many sub-paragraphs, we used the information down to the last level of disaggregation. To ensure the content validity of the research instrument, we adopted the following procedure. Each co-author designed independently a checklist before establishing a first draft which is the outcome of our discussion and consensus. Then, we sought the input of an independent IFRS expert to review and further discuss the list. As described in Table IV, the final checklist is composed of 128 items covering all the categories cited by the standard. To calculate this index, and in accordance with almost prior studies, three main characteristics were respected: (1) Dichotomous: under this method a score of 1 is attributed to an item if it is disclosed and a score of 0 otherwise (Street and Gray, 2001; Lopes and Rodrigues, 2007). (2) Adjusted for not applicability: this characteristic aims to avoid penalizing the firm for not disclosing items when they are not applicable (Al-Shammari et al., 2008; Tsalavoutas, 2011; Glaum et al., 2013 etc.). Hence, with a specific care during the coding process, we count one when a mandatory required item is disclosed, zero if the information is not disclosed, and not applicable if the item is not applicable. (3) Unweighted: The majority of disclosure research use unweighted indices: (Cooke, 1989; Street and Gray, 2001; Tsalavoutas, 2011; Juhmani, 2017). The total score is computed as the unweighted sum of the applicable items. This method considers that each single item is equally important for all user groups to avoid any subjectivity during the weighting process. Therefore, the compliance index (COMPL_IND) was measured as follows: Xm di COMPL_IND ¼ Xi¼1 n di i¼1 where: di = is item disclosed by the company; m = is the maximum number of items; and n = is the number of items applicable to that company. It should be noted that, to ensure that an item is not applicable and to avoid penalising a firm for not disclosing it, we minutely read the notes to the financial statements as well as the whole annual report before scoring a particular item. We also scanned the electronic version of the annual reports searching for the keywords linked to each item. Hence, we avoid missing any relevant information. To improve the reliability of the coding process, 20 observations were randomly selected to be scored by the co-authors and the qualified practitioner. When comparing the investigators results, we did not find any significant differences in the scores. 4.3 Independent variables To meet the main goal of this paper, seven CG variables are initially identified, which are the board size, board independence, CEO/Chairman duality, AC size, AC independence, AC meetings and AC expertise. Data on CGC have been collected with reference to the firms’ annual reports for the years 2014, 2015 and 2016. AC members’ biographies have been also checked. Independent variables considered in our research have been defined based on prior related papers. These variables are measured as described in Table II. 4.4 Control variables Other variables are likely to explain the level of mandatory requirements disclosed by the financial companies in Canada. Thus, we draw upon prior compliance studies so that we can Compliance with IFRS 7 MAJ Variable Independent variables Board size Board independence CEO/chairman duality Audit committee size Audit committee independence Audit committee meetings Audit committee expertise Control variables Firm size Leverage Profitability Auditor’s type Table II. Proxies for independent and control variables Readability Board gender diversity Audit committee gender diversity Proxy The number of directors in the board Proportion of non-executive directors on the board Dummy variable coded 1 if the CEO is also the chairman of the board and 0 otherwise The number of audit committee members Proportion of independent non-executive audit committee members The number of meetings held by the audit committee in that year The number of audit committee members who are accounting financial experts Natural Logarithm of total assets The ratio of the companies’ total liabilities to the companies’ shareholders’ equity The ratio of the companies’ net income to the companies’ shareholders’ equity (return on equity) Dummy variable coded 1 for companies audited by a Big 4 and 0 otherwise Natural Logarithm of the total number of annual report pages Proportion of females on the board of directors Proportion of females on the audit committee identify the most relevant variables that have been associated with mandatory disclosure levels. First, we control for the firm size following Cascino and Gassen (2015) and Mnif and Tahari (2017). According to Cooke (1989), the company size can explain, to a reasonable extent, the quality of its disclosures. In fact, larger companies tend to have more resources designated for accounting departments than smaller companies (Glaum and Street, 2003). Also, larger firms may have stronger incentives to fully comply with disclosure requirements because they may be exposed to greater political pressure than do smaller firms. Consequently, we expect a positive relation between firm size and FID. Second, and based on the agency theory, we include the company’s leverage level. According to Jensen and Meckling (1976), agency costs (more specifically communication costs) are higher in more indebted companies. As a result, companies with a higher leverage ratio are likely to disclose more information to reduce agency costs by reassuring the debt holders that their interests are protected. Following Lopes and Rodrigues (2007) and Yiadom and Atsunyo (2014), we expect that the firm leverage will be positively associated with the compliance level. Consistently with prior compliance studies (Glaum and Street, 2003; Al Mutawaa and Hewaidy, 2010), we control for the firm’s profitability. In their paper, Wang et al. (2008) affirm that highly profitable firms are more willing to expand their disclosures and provide better quality information to the public to acquire a positive impression about their performance. Following Amoako and Asante (2012) and Yiadom and Atsunyo (2014), we foresee a positive impact of the firm’s profitability on the compliance level. As for Tsalavoutas (2011), Glaum et al. (2013) and Mnif and Tahari (2017), we investigate whether the auditor’s type has any effect on our dependent variable. Based on the agency theory, Jensen and Meckling (1976) suggested that being audited by big audit firms acts as a mechanism to minimise agency costs and limits therefore managers’ opportunistic behaviours. Hence, the audit firm’s type is expected to be positively associated with the compliance level with IAS/IFRS requirements. In addition, we take into account the complexity of the annual reports disclosed by our sampled firms. Following André et al. (2018), we control for the readability of the firm’s report to study its effect on the compliance level (i.e. we intend to examine whether a voluminous annual report contains more disclosure details and enhances, therefore, the level of required disclosures rather than making more complex the understanding of such a report). Finally, we control for test for the board and the AC gender diversity. According to Campbell and Mínguez-Vera (2008), the presence of women directors can affect financial reporting quality. Similarly, Al-Shammari and Al-Saidi (2014) show that female participation in the company’s BD improves the financial performance of that company. Results on board and AC gender diversity are mixed. In their article, Parker et al. (2017) report that the presence of women on the AC is positively associated with the internal control quality, but their presence on the BD is negatively related to this quality. In contrast to Parker et al. (2017), Alfraih (2016) finds that female board directorship in Kuwaiti companies enhances compliance with IFRS requirements in Kuwait. In line with the studies above, we predict, that female participation on both BD and AC has implications on our dependent variable (i.e. FID). The definitions of our control variables are summarized in Table II. 4.5 Research models To test our hypotheses and to meet the objective of our research, we designed the following empirical models. Model 1 tests the impact of the overall CGC (i.e. BD and AC characteristics) considered in this study on the compliance level: COMPL_IND ¼ b 0 þ b 1 BD Size þ b 2 BD Ind þ b 3 DUAL þ b 4 AC Size þ b 5 AC Ind þ b 6 AC Meet þ b 7 AC Exp þ b 8 F Size þ b 9 LEV þ b 10 PROF þ b 11 AUD þ b 12 READ þ b 13 BD Gend þ b 14 AC Gend þ e Model 2 has been estimated to investigate the relation between the board characteristics and the level of compliance with considering the AC attributes: COMPL_IND ¼ b 0 þ b 1 BD Size þ b 2 BD Ind þ b 3 DUAL þ b 4 F Size þ b 5 LEV þ b 6 PROF þ b 7 AUD þ b 8 READ þ b 9 BD Gend þ e Model 3 aims at examining whether the AC characteristics influence the compliance disclosure index: COMPL_IND ¼ b 0 þ b 1 AC Size þ b 2 AC IND þ b 3 AC Meet þ b 4 AC Exp þ b 5 F Size þ b 6 LEV þ b 7 PROF...
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